SUMMARY: The Bundesbank added to a growing list of negative indicators this week when it warned that Germany would likely enter recession in the third quarter.
is projecting ‘lackluster’ growth over the current quarter, culminating in
what’s expected to be a slight contraction. Since the German economy shrunk by
0.1% in the second quarter, such a result would represent a technical
recession, which in and of itself is no cause for serious concern. However, if
certain negative trends in global trade patterns persist, then Germany’s
export-reliant economy could be in for a bumpy ride for the foreseeable future.
– a country known for its robust industrial policy and prudent fiscal
stewardship – is seldom the negative exception on a continent that is otherwise
still in growth mode. But the nature of the current disruption in global
markets – trade barriers, supply chain disruptions, and currency volatility –
strikes at the heart of Germany’s export-dependent model.
thus no surprise that flagging industrial production and a sharp drop in German
exports are behind the country’s recent economic doldrums. Over the past year,
exports have fallen by approximately 8% and industrial production has dropped
it’s undeniable that German manufacturing is reeling, there are still several
bright spots for the economy. For one, despite a recent downward blip, the
service sector has remained resilient. Real estate has also been booming
alongside other euro zone countries.
perhaps Germany’s most valuable trump card for avoiding a protracted downturn
is its fiscal wiggle room vis-a-vis other distressed economies like Italy.
Berlin has been running a primary surplus for the past five years; it currently
weighs in at around 1.7% of GDP. Consequently, the Merkel government has plenty
of options for stimulating the economy, and there are reports that it’s
preparing to do just that. According to Bloomberg, the government is putting
together a spending package aimed at bolstering domestic consumption and
incentivizing big-ticket purchases such as new cars and appliances. Social
spending would also be boosted to increase incomes for those on state
no shortage of compelling political subtext on offer here. On the European
level, a deep recession would cast the ongoing Brexit saga in a very different
light, and though it’s highly unlikely that Brussels would give ground on any
of its red lines (including a renegotiated backstop), EU negotiators may be
more inclined to adopt a softer tone given the increasingly unpalatable fallout
of a no-deal Brexit. Yet it should be noted that the timing doesn’t entirely
match up since a deep German recession would presumably materialize after the
current and supposedly immutable October 31 deadline.
also German politics to consider. The Merkel government is shaky, both
figuratively and literally following a series of health-related incidents
surrounding the chancellor. Just how long the Social Democrat Party (SPD) wants
to perpetuate the self-harm of remaining in federal coalition has always been a
burning question; the party’s latest electoral flop came just a few months ago
when it shed approx. 10% from its 2014 support levels in European parliamentary
elections and lost control of Bremen – a state that it had ruled for over 73
years. There are several scenarios that could precipitate a change at the
highest level of German politics, and all of them are made more likely by the
country slipping into a deep recession.
question worth considering is what this all means for Germany’s export-led
growth model. Or in other words: Is this recession the exception or the rule
going forward? Germany’s growth miracle was in many ways a product of the
specific conditions of the Cold War era, when competitors were largely based in
the West and German companies like Volkswagen and BMW had a technological
competitive advantage. Can Berlin continue its yearly surpluses and industrial
facilitation of old amidst this new competitive environment? Only time will